Focus on next twist of plot and miss wider story arc

The narrative structure of the US’s economic recovery since 2009 has been purest soap opera. Each episode ends on a cliffhanger – a promise that the next data release will grant resolution and tell the viewer, unhappily addicted, whether the economy will accelerate or plunge back into a double-dip recession.

Recently, the storylines have tended to the gloomy, all about a “soft patch” in growth. The ADP employment report is fickle but Wednesday’s number was a shocker: only 38,000 new jobs in May compared with an average of 194,000 so far this year. Supply chain managers reported much slower growth in manufacturing.

Once again, markets will be glued to Friday’s monthly non-farm payrolls report. It is the single most important US data release. If it shows a weakening labour market, then all will again be gloomy.

But to focus too hard on the next twist in the economy’s plot risks missing the wider arc of the story. There are some deeply worrying trends about the long-term health of the US labour market.

The Great Recession of 2007-09 ended some durable economic patterns. A decline in the savings rate that began in 1981 seems to be over, at least for now. The rise in home ownership that began in the mid-1990s has gone into reverse.

In the labour market, however, the recession accelerated trends that were making the US look less dynamic and flexible.

The most obvious example is the percentage of US citizens who participate in the labour force. After a long rise from the 1960s, it peaked at about 67 per cent in 2000. The recession has knocked it to 64 per cent.

Participation is unlikely to bounce all the way back in the recovery. The main reason is an ageing population but there is also the perfection of another decades-old trend: male job losses during the recession mean that, finally, 50 per cent of US workers are women.

US growth in the future will get no fuel injection as a rising share of the population chooses to work. There will be a gentle drag instead.

Another trend is a seeming decline in US labour mobility. A recent Federal Reserve working paper found that “internal migration has fallen noticeably since the 1980s” with “only limited roles for the housing market contraction and the economic recession”.

What did happen in the recession was a fall, which may yet be fully reversed, in job turnover. In 2007, both new hires and job departures ran at about 5m a month; during the recession, that fell to 4m.

The reasons for these changes are obscure but if people are changing jobs less often, then the result may be a rise in long-term unemployment and in the structural unemployment rate.

Steve Blitz, senior economist for ITG Investment Research, points out another trend that began in the 1970s and accelerated during the recession: fewer and fewer US citizens expect their income in six months’ time to be higher.

In part that reflects lower inflation but, during the recent recession, there were more people expecting their income to fall rather than rise. That never happened in previous recessions.

Mr Blitz says the decline is “inextricably linked to the rising US trade deficit” as companies outsource work overseas. It also mirrors the long-term decline in the share of national income that goes on wages.

The economic consequences of this are hard to demonstrate but it may result in reluctance to increase consumption or buy houses.

Compared with Europe or Japan, the US labour market remains more vital on most of these measures. The concern is that the trends have turned and that may mean the labour market does not behave as it did in the past.

Policymakers have few countermeasures to hand – tough for a politician such as Barack Obama, whose re-election prospects depend on jobs. Fiscal or monetary stimulus can do little.

Watch Friday’s payroll numbers for the short-term story about growth – but do not forget the more profound tale unfolding in the background.